Small businesses are the most vulnerable to occupational fraud and abuse and suffer disproportionately larger losses as a result, according to the 2004 "Report to the Nation on Occupational Fraud and Abuse" prepared by the Association of Certified Fraud Examiners. Compounding the problem, small businesses are less likely to have the ability to survive such losses.

CPAs are often the first resource small businesses contact when they suspect fraud has occurred. This is particularly true for small nonpublic clients that may not have the internal audit or human resource departments that are familiar with the processes and procedures to be followed in such circumstances. How should CPAs advise such clients? First and foremost, they should caution against reaching any conclusions until the alleged incident is investigated thoroughly Then they should follow this step-by-step process. The CPA can perform steps one and two concurrently

* Make copies of, but do not work from or alter, original documents. These may be considered evidence and required in subsequent prosecution/litigation.

* Quantify losses.

* Consider contacting law enforcement.

Step four: Take precautions

* You may have to consider placing the employee on administrative leave or terminating his or her employment.

* Deny the suspect access to the physical premises and associated properties.

* Secure company credit cards and safety deposit boxes.

* Disable the suspect's computer and network access.

* Change signatories on bank accounts for which the suspect employee has signature authority

Step five: Mitigate the damages

* Seek restitution.

* File a fidelity bond claim.

Step six: Advise the client on instituting internal controls

* Develop written accounting policies and procedures.

* Segregate functions and duties.

* Limit access to documents, computers and assets to only those who need it.

* Review and approve all journal entries and disbursements.

* Require dual signatures on all checks.

* Prenumber invoices and checks for ease of tracking.

* Conduct surprise internal control reviews at intervals.

* Ensure that key financial personnel take a vacation annually Verify or audit their work during their absence.

* Secure fidelity bond coverage.

* Employ a third-party hotline service to receive tips of suspected fraud.

* Institute appropriate preemployment screening processes.

Considering the devastating potential for loss from fraud by small business owners, CPAs need to be well-informed regarding incidents of suspected fraud. Equally important, they should advise small business owners about the need to make fraud prevention a top priority